Surmodics(SRDX) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements Presents the company's unaudited financial position, operations, and cash flows for the periods ended June 30, 2023 Condensed Consolidated Balance Sheets Total assets and liabilities increased, driven by a rise in cash and new long-term debt Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | September 30, 2022 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $44,579 | $18,998 | +$25,581 | | Total Current Assets | $85,850 | $57,587 | +$28,263 | | Goodwill | $43,844 | $40,710 | +$3,134 | | Total Assets | $188,901 | $158,359 | +$30,542 | | Liabilities & Equity | | | | | Short-term borrowings | $0 | $10,000 | -$10,000 | | Income tax payable | $11,953 | $0 | +$11,953 | | Long-term debt, net | $29,353 | $0 | +$29,353 | | Total Liabilities | $76,489 | $49,967 | +$26,522 | | Total Stockholders' Equity | $112,412 | $108,392 | +$4,020 | Condensed Consolidated Statements of Operations A significant license fee drove a 111% revenue increase and a shift to net income in Q3 2023 Statements of Operations Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $52,483 | $24,854 | $104,614 | $73,963 | | Royalties and license fees | $34,153 | $8,795 | $52,347 | $26,738 | | Operating income (loss) | $21,412 | $(7,143) | $7,600 | $(15,484) | | Net income (loss) | $7,346 | $(5,651) | $(8,230) | $(12,546) | | Diluted net income (loss) per share | $0.52 | $(0.41) | $(0.59) | $(0.90) | Condensed Consolidated Statements of Cash Flows Operating cash flow turned positive and financing activities provided significant cash from new debt Cash Flow Summary (Nine Months Ended June 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $9,264 | $(14,723) | | Net cash (used in) provided by investing activities | $(2,170) | $4,802 | | Net cash provided by (used in) financing activities | $17,987 | $(673) | | Net change in cash and cash equivalents | $25,581 | $(11,079) | Notes to Financial Statements Details a significant milestone payment from Abbott, new credit facilities, and segment performance - In June 2023, the company received FDA Premarket Approval (PMA) for its SurVeil™ drug-coated balloon (DCB), triggering a $27 million milestone payment from its commercialization partner, Abbott[23][25] - On October 14, 2022, the company entered into a new credit agreement with MidCap, drawing down a $25 million term loan and a $5 million revolving credit facility[43][44] - In Q2 2023, the company initiated a spending reduction and workforce restructuring plan, resulting in a $1.3 million charge for severance and related costs[70][92] Revenue by Segment (Nine Months Ended June 30, in thousands) | Segment | Revenue 2023 | Revenue 2022 | % Change | | :--- | :--- | :--- | :--- | | Medical Device | $84,739 | $52,889 | +60% | | In Vitro Diagnostics | $19,875 | $21,074 | -6% | | Total Revenue | $104,614 | $73,963 | +41% | Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes significant revenue growth from the Abbott milestone payment and improved liquidity from new debt Results of Operations Q3 revenue grew 111% to $52.4 million, shifting the company to a $21.4 million operating income Revenue Breakdown (Q3 2023 vs Q3 2022, in thousands) | Revenue Stream | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Medical Device | $46,014 | $17,528 | +163% | | - Product sales | $9,299 | $6,741 | +38% | | - License fees | $25,933 | $1,024 | +2433% | | In Vitro Diagnostics | $6,469 | $7,326 | -12% | | Total Revenue | $52,483 | $24,854 | +111% | - The increase in Medical Device license fees was driven by the recognition of $24.6 million from the $27.0 million milestone payment from Abbott upon FDA premarket approval of the SurVeil DCB[85] - R&D expense declined 13% in Q3 2023, reflecting a spending reduction plan initiated in Q2 2023 to prioritize near-term growth opportunities[89] - Product gross margin decreased from 63.1% to 55.8% in Q3 year-over-year, primarily due to an adverse product mix from increased sales of lower-margin medical devices[88] Liquidity and Capital Resources Liquidity improved significantly with cash reaching $44.6 million due to new debt and a milestone payment - Cash and cash equivalents increased by $25.6 million since September 30, 2022, reaching $44.6 million[104] - Key liquidity events included drawing $30 million from the new MidCap credit facility and receiving a $27 million milestone payment from Abbott[105][108] - The company has access to a $25 million revolving credit facility and up to an additional $75 million in term loans under the MidCap agreement, subject to conditions[105][110] Customer Concentrations Significant revenue concentration exists with Abbott and Medtronic, accounting for 32% and 10% respectively Customer Revenue Concentration (Nine Months Ended June 30, 2023) | Customer | % of Consolidated Revenue | | :--- | :--- | | Abbott | 32% | | Medtronic | 10% | - Revenue from the SurVeil DCB license agreement with Abbott alone represented 27% of total revenue for the nine-month period[112] Quantitative and Qualitative Disclosures About Market Risk Primary market risks include interest rates, which are partially hedged, and foreign currency exposure - The company entered into a five-year interest rate swap to fix the interest rate on its $25.0 million term loan at 10.205% per annum[118] - The company is exposed to Euro currency risk from its manufacturing operations in Ireland, as revenue and expenses denominated in Euros are translated back to U.S. dollars[120] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[121] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[122] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various routine legal actions related to its business operations - The company is periodically involved in various legal actions, including intellectual property and employment disputes[124] Risk Factors Refers to risk factors previously disclosed in the company's Annual and Quarterly Reports - No new risk factors are disclosed; the report references risks detailed in prior SEC filings[125] Unregistered Sales of Equity Securities and Use of Proceeds Details minor share repurchases and notes that its credit agreement restricts the buyback program - The company has $25.3 million available for future stock repurchases under its current authorization[128] - The ability to repurchase common stock is restricted by the terms of the MidCap credit agreement[128] Other Items and Exhibits Confirms no defaults or other material information to report and lists filed exhibits - Item 3: No defaults upon senior securities[129] - Item 4: Mine Safety Disclosures are not applicable[130] - Item 5: No other information to report[131]